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Tuesday's Top Upgrades (and Downgrades)

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, in the doldrums between earnings seasons, we'll be looking at a series of "target tweaks," as analysts raise their price targets on transports DryShips (NASDAQ: DRYS) and Union Pacific (NYSE: UNP) , but lower them on eBay (NASDAQ: EBAY) . In fact, let's start with that one...

eBay stock: Sell it now?The week opened bright for eBay shareholders, when The Benchmark Company doubled down on its endorsement of eBay Monday. Noting that the stock is now trading near its 52-week low, Benchmark said the shares sell for "a discount to our e-commerce peer group" despite showing "mid-teens top-line growth" and the potential for more of the same in 2015 -- and insisted eBay is still a buy.

Today, one analyst is begging to differ.

This morning, analysts at Topeka Capital Markets announced a 10% cut to their price target on eBay shares, which they now value at just $54. Although this new target sits 10% above where the shares trade today, Topeka still isn't recommending that investors buy into the online auctioneer. And Topeka is right to be cautious. While a year-long slump in share price has eBay shares looking more attractive than they've been previously, the stock still looks only fairly valued at best.

Indeed, many investors might argue the shares are over-valued, given that eBay is currently showing negative profit over the past year, and as a result has no meaningful P/E ratio to value it by. Valuing the stock on free cash flow is, however, still possible.

S&P Capital IQ data show that eBay generated just under $4.1 billion over the past year, resulting in a price-to-free cash flow ratio of 15.2 on the stock. That's a bit high for a company expected to grow earnings at less than 13% annually over the next five years. It's not frightfully expensive. But when you get right down to it, Topeka is still right, and Benchmark is still wrong: Even near its 52-week low, the stock still costs just a bit too much to call it a buy.

Could DryShips float higher? Turning now to the stocks that Wall Street's more optimistic about, dry bulk shipper DryShips got a big vote of confidence this morning when analysts at Imperial Capital boosted their price target on the stock... by 45%! Quoted on StreetInsider.com Tuesday, Imperial's analysts argue that "an improvement in valuation at consolidated Ocean Rig UDW and prospectively improving dry bulk and tanker day rates" justify their hike in price target. They may even be right -- but I wouldn't bet on it.

Meanwhile, taken together or separately, the firms remain deeply in hock. Ocean Rig's debt load, net of cash on hand, is given as $3.8 billion. DryShips' debt is at $5.4 billion. With no cash coming in to service the debt, insolvency remains a very real risk for both firms. And even if that doesn't happen, chances look good that DryShips will be forced to sell additional shares to keep itself afloat -- diluting existing shareholders.

As buy arguments go, this one simply doesn't hold water.

Better bets on dry land?Final ratings tweak now, and this one goes to Union Pacific -- which FBR Capital upped to a fair valuation of $120 per share today, or about $9 and change above where the shares trade today. FBR still isn't recommending buying the stock, however. So why not?

In today's overheated market, you won't be shocked to learn that Union Pacific shares cost quite a lot, and probably more than they're worth.

UNP shares sell for north of 20 times earnings today. On a 1.8% dividend-paying stock with a projected growth rate of nearly 15%, that seems expensive. The stock looks even more expensive when valued on free cash flow, which at $3.45 billion at last report, was falling about $1 billion short of the number Union Pacific reports for net income earned over the past year.

In the stock's defense, I should point out that railroads are a capital intensive business, and most of Union Pacific's rivals suffer from similar cash-profit deficiencies. Indeed, when measured rail by rail against rivals such as CSX, Norfolk Southern, or (especially) Kansas City Southern, Union Pacific actually looks pretty good in comparison -- and sports a lower P/E ratio than the average. On a relative basis, I'm willing to go so far as to say the stock looks like a better value than its rivals.

But that doesn't change the fact that on an absolute valuation basis, the stock's still no bargain.

Rich Smith has no position in any stocks mentioned, and doesn't always agree with his fellow Fools. Case(s) in point: The Motley Fool recommends eBay. The Motley Fool owns shares of CSX and eBay.

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As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.
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